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Make Sure LLCs Classified as a Partnership Use the Correct California Forms

We are seeing some limited liability companies (LLCs) classified as partnerships filing the incorrect forms. This causes confusion, processing delays, and potential penalties that can be avoided.

LLCs organized in California, registered with SOS, or doing business in the state, are required to file Form 568, Limited Liability Company Return of Income, but often file Form 565, Partnership Return of Income, in error. When such LLCs file a Form 565, we process the return as a partnership and create a new account. In addition, if payments are made, we apply the payments to that new account number. Since we did not receive a Form 568 for the LLC account, we also issue a delinquent notice and assess penalties for not filing. In some instances, though the incorrect tax return was filed, the correct LLC Tax Voucher (Form 3522) was submitted with the payment. The payment is then applied to the LLC account, but the return is on the new account number.

To add to the confusion, when the LLC realizes that the incorrect form was filed, the LLC files an amended LLC return, to correct the error. Occasionally, staff is able to determine the amended LLC return was filed to correct the filing of a wrong form. If this occurs, our procedure is to make the necessary adjustments to the LLC account and close the partnership account.

Unfortunately, due to timing of the filing and processing of the amended LLC return and the partnership return filed in error, the accounts are not matched up and two different accounts exist until corrected.

One of the possible reasons this occurs is that foreign (non-California) LLCs may not be familiar with California filing requirements. Another possible reason for the confusion is that, for federal purposes an LLC classified as a partnership must file the partnership return, Form 1065, U.S. Return of Partnership Income. If the company is a partnership then the 565 is the correct form to file, but Form 568 is the correct form to file when the company is organized in California, registered with SOS, or doing business in the state, as an LLC.

LLCs may file a Form 565 if they meet the requirements for Finanz status.[1] Generally, only foreign LLCs that are limited partners of partnerships doing business in the state qualify. Additionally, changes to the definition of “doing business” in CR&TC § 23101 (effective for tax years beginning January 1, 2011) may result in entities previously eligible for Finanz treatment being disqualified.

Filing the correct form will save you and your clients’ time, energy, and cost. If you find that you or your LLC client filed an incorrect tax return, contact the Tax Practitioner Hotline at 916.845.7057. For more information about LLCs, please see Publication 3556 LLC MEO, Tax Information for Limited Liability Companies and the 568 Tax Booklet, Limited Liability Companies located on our website.

[1]Appeal of Amman & Schmid Finanz AG, et-al, 96-SBE-008.

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